FDIC Backs Ban on Banks Trading for Own Profit; Volcker rule would limit banks' trading

Reply Wed 12 Oct, 2011 10:41 am
This is long overdue, but will Volcker be able to achieve it? The banks will fight it fiercely. ---BBB

FDIC Backs Ban on Banks Trading for Own Profit
By MARCY GORDON AP Business Writer
WASHINGTON October 11, 2011 (AP)

Banks would be barred from trading for their own profit instead of their clients under a rule being proposed by federal regulators.

The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote Tuesday. The ban on proprietary trading was required under last year's financial overhaul law.

For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out. That's what happened during the 2008 financial crisis.

The Federal Reserve has also approved the draft of the so-called Volcker Rule, which was named after former Fed Chairman Paul Volcker.

The Securities and Exchange Commission and Treasury Department must still vote on it, and then the public has until January 13 to comment. The rule is expected to take effect next year after a final vote by all four regulators.

Congress and President Barack Obama had high hopes for the rule. But they left most of the details for regulators to sort out.

It's unclear how strictly the ban will be enforced. For example, it can be hard to tell whether an investment is intended to benefit a bank or its clients and whether federally insured deposits could be put at risk by these trades.

And in some cases, banks can get around the rule and continue making proprietary trades. For example, they can make such trades if they are intended to offset other risky trades made on behalf of clients.

Wall Street banks have complained that the ban on proprietary trading could prevent them from buying and selling investments that their customers might want. It would also put U.S. financial firms at a competitive disadvantage to those in other countries.

At the same time, several big U.S. banks have already shut down their proprietary trading operations in response to enactment of the financial overhaul.

The rule also would limit banks' investments in hedge funds and private equity funds, which are lightly regulated investment pools. Banks wouldn't be allowed to own more than 3 percent of such a fund. In addition, a bank's investments in such a fund couldn't exceed 3 percent of its capital.

Before Congress passed the financial regulatory overhaul, banks had no limit on how much of those funds they could own. Still, typically on Wall Street, such investments already fall below the 3 percent threshold.

Banks could still put their clients' money into those funds. They will still be able to manage such funds, and collect fees and a percentage of trading profits.
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Reply Wed 12 Oct, 2011 10:56 am
I hope the FEDs enforce the HELL out this ruling! Thanks BBB for bringing it up here.
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Reply Wed 12 Oct, 2011 11:33 am
SEC third regulator to support ban on banks trading for their own profit
By Associated Press
October 12, 2011

WASHINGTON — The Securities and Exchange Commission Wednesday backed a proposal to bar banks from trading for their own profit instead of their clients.

The SEC voted 4-0 to send the ban on so-called proprietary trading out for public comment. The rule was required under the financial regulatory overhaul.

Critics on the left have dismissed the effort as weak and marred by loopholes. Banks argued it would hurt the economy.

The SEC is the third federal regulator to support the proposal, called the Volcker Rule after former Federal Reserve Chairman Paul Volcker. On Tuesday, the Federal Deposit Insurance Corp. and the Federal Reserve both backed it.

For years, banks bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers may have to bail them out. That happened during the 2008 financial crisis.

Under the proposal, banks must hold investments for more than 60 days and bank managers must make sure employees comply with restrictions.

The public has until Jan. 13 to comment on the rule, which is expected to take effect by July after a final vote by all the regulators. Banks would have until July 2014 to comply.

Critics on the left contend that the rule as written is too vague and its effect on risk-taking will be limited. Banks have a history of working around rules and exploiting loopholes. In this case, banks can make most trades simply by arguing that the trade offsets another risk that the bank bet on.

Wall Street banks say the ban on proprietary trading could prevent them from buying and selling investments that their customers might want.

SEC Commissioner Troy Paredes, a Republican, on Wednesday echoed Wall Street’s criticism. He said the restrictions could dry up the flow of securities trading in the markets and would impose a heavy compliance burden on banks. Still, Paredes voted to approve the draft the rule.

The rule also would limit banks’ investments in hedge funds and private equity funds, which are lightly regulated investment pools. Banks wouldn’t be allowed to own more than 3 percent of such a fund. A bank’s investments in such a fund couldn’t exceed 3 percent of its capital.

Banks could still put their clients’ money into those funds. They will still be able to manage such funds, and collect fees and a percentage of trading profits.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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Reply Wed 12 Oct, 2011 11:36 am
October 12, 2011
Wall Street Sees ‘No Exit' From Financial Woes as Bankers Fret

Oct. 12 (Bloomberg) -- Wall Street executives, facing demonstrators camped for a fourth week in New York's financial district, say they're anxious and angry for other reasons.

An era of decline and disappointment for bankers may not end for years, according to interviews with more than two dozen executives and investors. Blaming government interference and persecution, they say there isn't enough global stability, leverage or risk appetite to triumph in the current slump.

“I don't think it's a time to make money -- this is a time to rig for survival,” said Charles Stevenson, 64, president of hedge fund Navigator Group Inc. and head of the co-op board at 740 Park Ave. The building, home to Blackstone Group LP Chairman Stephen Schwarzman and CIT Group Inc. Chief Executive Officer John Thain, was among those picketed by protesters yesterday. “The future is not going to be like a past we knew,” he said. “There's no exit from this morass.”

An anemic global economy, the European sovereign debt crisis, U.S. unemployment stuck above 9 percent and swooning stock markets have sapped the euphoria that swept Wall Street in 2009 as it rebounded to record profits after the credit crisis. The benefits of a $700 billion taxpayer bailout and $1.2 trillion in emergency funding from the Federal Reserve have faded. Next week Goldman Sachs Group Inc. may report its second quarterly loss per share since going public in 1999, according to the average estimate of 26 analysts surveyed by Bloomberg.

‘Financial Bubble'

“They're not going to make the kind of money they wanted,” said William Hambrecht, chairman of San Francisco- based WR Hambrecht & Co., who designed the Dutch auction of Google Inc.'s 2004 initial public offering. “I'm not sure people really have come to terms with the fact that what we had was a financial bubble.”

New rules from the Basel Committee on Banking Supervision will more than double capital requirements for banks. Fixed- income revenue could fall 25 percent under a draft of the Volcker rule, which may outlaw so-called flow trading, according to an Oct. 10 note from Brad Hintz, a Sanford C. Bernstein & Co. analyst. Leverage has been cut by more than half at banks including Goldman Sachs and UBS AG, and an Oliver Wyman and Morgan Stanley report estimates that regulation may reduce returns on equity by 4 to 6 percentage points.

The new rules are the result of “societal objectives of a populist administration in Washington,” private-equity investor Wilbur Ross said in an e-mail. John Phelan, co-founder of MSD Capital LP, a New York-based fund that manages assets for billionaire Michael Dell, said “the whole capitalist system is being called into question.”

‘Ways to Profiteer'

Not everyone is worried about the banks.

“I wouldn't shed too many tears for Wall Street,” Neil Barofsky, 41, the former special inspector general for the Troubled Asset Relief Program who is now teaching a class on the financial crisis at New York University School of Law, wrote in an e-mail. “The systemic advantage that the too-big-to-fail banks enjoyed in the lead-up to the financial crisis may be diminished in the near term, but the structure is still essentially the same and will almost certainly help catapult them to record profits and bonuses once the good times return.”

Ross, 73, the billionaire chairman of New York-based WL Ross & Co., said Wall Street's “inherent ingenuity” shouldn't be discounted and that “the history of the investment community shows that it will find ways to profiteer.”

Others identified potential financial bright spots, including so-called black-swan and tail-risk funds designed to protect against market shocks. One black-swan fund, Universa Investments LP, whose Santa Monica, California, office features a Japanese print of a wave about to break over fishermen, produced returns of 20 percent to 25 percent this year, though August, according to a person familiar with the matter.

‘More Secular'

Still, almost all corners of Wall Street are suffering. James Staley, head of JPMorgan Chase & Co.'s investment bank, estimated last month that third-quarter trading revenue may drop by 30 percent and investment-banking fees by 50 percent. The Standard & Poor's 500 Index had its worst decline in the quarter since 2008, and Brent crude-oil futures saw their longest slump. The average yields demanded on U.S. commercial-mortgage bonds in excess of Treasuries climbed the most in three years.

“Unlike some other slowdowns, this feels more secular,” said Wilson Ervin, a Credit Suisse Group AG senior adviser who stepped down as chief risk officer in 2009.

‘Recalibrated' Compensation

While there had been “an understandable path” out of the turmoil of 2008, there's a more encompassing uncertainty now, said Frederick Lane, vice chairman of investment banking at St. Petersburg, Florida-based Raymond James Financial Inc.

“There's going to be some disillusionment, similar to physicians,” said Lane, 62. “The notion that somehow going to medical school would deliver you substantial wealth and prestige is no longer true.”

Ilana Weinstein, CEO of search firm IDW Group LLC, said in an interview that she had nothing good to offer a trading executive in his early 40s who complained last month about morale at his bank, one of the six largest in the U.S.

“This is the first time that people don't necessarily believe it will get better,” said Weinstein, whose Third Avenue office has two exits “like a high-end plastic surgeon” to assure discretion. “Compensation has been recalibrated.”

Michael Karp, 42, CEO of New York-based recruitment firm Options Group Inc., said Wall Street pay will fall 30 percent this year, and more for executives. It will be flat or down even in businesses doing relatively well, such as emerging markets and commodities, he said.

Job Cuts

Those are the survivors. The biggest global banks already had been cutting jobs at the fastest rate since 2008 when Bank of America Corp. said last month that it will eliminate 30,000 positions. London-based HSBC Holdings Plc, Europe's largest lender, aims to shed the same amount. UBS, Switzerland's biggest bank, is shrinking after a $2.3 billion trading loss.

“Sharply” falling profits will lead to almost 10,000 financial-services job cuts in New York City by the end of 2012, according to a report released yesterday by New York State Comptroller Thomas P. DiNapoli. The prospects for Wall Street “have cooled considerably,” he said in a statement.

“The stress levels are getting very high,” said MSD Capital's Phelan.

The 46-year-old hedge-fund manager said the current aversion to risk across Wall Street could jeopardize profits.

“It's one of the things I struggle with: Everybody's risk- off, so should I be risk-on?” he said. “There are so many things I have to worry about.”

Two former Goldman Sachs managing directors who asked not to be identified because they weren't authorized by their current firms to speak, one a former management committee member and the other a trading head, also said they were worried that investment bankers have lost their appetite for risk.

Torrisi Italian Specialties

Uncertainty didn't stop some on Wall Street from profiting during the U.S. housing collapse, when Deutsche Bank AG trader Greg Lippmann helped create and profited from a multibillion- dollar market in subprime-based derivatives. He said Wall Street will have fewer exotic products to sell and trade, drawing an analogy to the popular no-reservations restaurant Torrisi Italian Specialties.

“No choosing, great food, low price, no pizzazz,” said Lippmann, co-founder of New York hedge fund LibreMax Capital LLC. “A couple of years ago, the hottest place to go would be someplace that they just spent $5 million decorating and they've got three or four models answering the phones. People want stripped-down now.”

‘Everybody Hates Me'

That isn't diminishing lobbying efforts to soften rules mandated by the Dodd-Frank Act, which would reduce risk, curtail proprietary trading and force more transparency in the $601 trillion derivatives market. Large financial institutions have been “exceedingly aggressive at trying to roll back reform” and have largely succeeded, said Greenlight Capital Inc. President David Einhorn, 42, who bet against Lehman Brothers Holdings Inc. in the months before that firm's collapse.

Leon Cooperman, the first Goldman Sachs Asset Management CEO and head of hedge fund Omega Advisors Inc. in New York, said Wall Street has been “excessively” blamed and President Barack Obama has “continued to project himself as anti-wealth, anti- business and socialist in his leanings.”

Phelan said he's worried about “social unrest.”

“My taxes are going up,” he said. “Everybody hates me. I have two friends who bought land in New Zealand. They're trying to convince me to go.”

He isn't planning to visit.

“I'm not one of those extreme people,” he said.

Occupy Wall Street

A version of that social unrest is taking place in lower Manhattan's Zuccotti Park, where Occupy Wall Street protests against bank bailouts and income inequality have gained support from Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman. On Oct. 1, police halted a march over the Brooklyn Bridge, arresting about 700, and have used pepper spray.

“We have too many regulations stopping democracy and not enough regulations stopping Wall Street from misbehaving,” Stiglitz, an economics professor at Columbia University, told protesters the next day. “We are bearing the cost of their misdeeds. There's a system where we've socialized losses and privatized gains. That's not capitalism.”

Bankers aren't optimistic about those gains. Options Group's Karp said he met last month over tea at the Gramercy Park Hotel in New York with a trader who made $500,000 last year at one of the six largest U.S. banks.

The trader, a 27-year-old Ivy League graduate, complained that he has worked harder this year and will be paid less. The headhunter told him to stay put and collect his bonus.

“This is very demoralizing to people,” Karp said. “Especially young guys who have gone to college and wanted to come onto the Street, having dreams of becoming millionaires.”

--With assistance from Christine Harper, Shannon D. Harrington, Dawn Kopecki and Michael J. Moore in New York, Silla Brush in Washington and Seth Lubove in Los Angeles. Editors: Robert Friedman, Peter Eichenbaum
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Reply Wed 12 Oct, 2011 11:38 am
Trader Pay Would Face Restrictions Under Draft Volcker Rule
September 26, 2011
By Cheyenne Hopkins and Phil Mattingly

(Updates with Kaufman comment starting in 18th paragraph.)

Sept. 26 (Bloomberg) -- U.S. banks would have to change the way they compensate traders involved in market-making activities under one of the proposed restrictions of the so-called Volcker rule, according to a draft circulating among regulators.

The rule, which aims to ban most proprietary trading by banks with federally insured deposits, would exempt trades related to market-making as long as the activity met at least seven standards, or principles. One principle would be that traders get paid from fees and the spread of the transactions rather than the appreciation or profit from their positions, according to a copy of the draft reviewed by Bloomberg News.

The Volcker rule, part of the Dodd-Frank Act, is being written by regulators in five Washington agencies and may be released as early as October, according to three people briefed on the discussions. It aims to reduce the chance that banks will make risky investments with their own capital that put their deposits at risk.

A forced change to pay structure “could have the effect of driving people out of the regulated industry to the unregulated industry,” said Douglas Landy, a partner at Allen & Overy LLP who once worked at the Federal Reserve Bank of New York.

Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley have shut down or made plans to spin off standalone proprietary-trading groups to prepare for the rule, which is named for its original champion, former Federal Reserve Chairman Paul Volcker.

174 Pages

Lawmakers who crafted Dodd-Frank in 2010 chose to exempt market-making from the rule, along with certain forms of hedging and underwriting, because of concerns that a broad ban on proprietary activities could bring some U.S. and world markets to a halt. Firms including Goldman Sachs and Morgan Stanley serve as market-makers when they accept the risk or hold shares of trades in order to facilitate client orders.

The 174-page draft, dated Aug. 11, shows among other things how regulators including the Federal Reserve and Federal Deposit Insurance Corp. are working to define market-making. Besides compensation, the principles outlined in the draft would require that trading positions have near-term demands and no large anticipation positions; have a revenue structure based on fees and commissions and not on making money on the positions themselves; and that firms fall under the Securities and Exchange Commission’s guidance of a “bona-fide” market-maker.

Banks also would be required to institute compliance programs to monitor when traders are moving toward banned positions. Those internal controls are also designed to ensure the firm does not place too much capital at risk.

Lobbying the Fed

Lawyers and executives from firms including Goldman Sachs, Citigroup Inc. and Morgan Stanley have met with regulators to discuss how to craft the definition, according to disclosures posted on the Fed’s website.

Market-making is “critical to the liquidity of financial instruments particularly in times of financial stress and, by consequence, the financial stability of the United States,” Richard Whiting, the executive director and general counsel of the Financial Services Roundtable, a Washington-based trade group representing the largest banks, wrote in a November comment letter to regulators.

The draft proposal may still change, the people briefed on it said. Each of the draft’s sections is followed by dozens of questions, hundreds in all, from regulators seeking more details before writing the final draft language. Those questions will remain open when the proposal is released by regulators for public comment in the coming weeks, said one person with knowledge of the plans.

Treasury Role

The Fed, FDIC and SEC, as well as the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission, each must approve the proposal. The Treasury Department is responsible for coordinating the regulation.

Spokesmen David Barr of the FDIC, Robert Garsson of the OCC, John Nester of the SEC, Barbara Hagenbaugh of the Fed, and Steven Adamske of the CFTC all declined to comment on the draft proposal.

Standalone proprietary trading accounted for as much as 12.4 percent of trading revenue at the six largest U.S. banks in a quarter, and as much as 3.1 percent of total revenue, according to a July report by the Government Accountability Office. In the fourth quarters of 2007 and 2008, the groups accounted for about 66 percent and 80 percent of total trading losses, according to the report, which did not take into account proprietary trading in other parts of the bank.

‘Outwardly Similar’

The Financial Stability Oversight Council, a group of regulators established by Dodd-Frank, acknowledged the complexity of finding the line between a bank’s proprietary trading and its activities on behalf of clients.

“The challenge inherent in creating a robust implementation framework is that certain classes of permitted activities -- in particular, market making, hedging, underwriting, and other transactions on behalf of customers -- often evidence outwardly similar characteristics to proprietary trading, even as they pursue different objectives,” the council said in a January report. The council said regulators should aim for flexibility in their identification of illegal activity.

“To the extent the proposal relies on internal compliance mechanisms rather than hard and fast rules, I think that’s better,” said Satish Kini, co-chairman of the Debevoise & Plimpton LLP’s Banking Group.

‘Virtually Impossible’

Internal compliance programs, even with strong regulatory oversight, will end up falling short, according to former Senator Ted Kaufman, a Delaware Democrat who pushed to separate investment and commercial banking during the 2010 Dodd-Frank debate.

“This is trying to figure out how many angels can dance on a pin,” Kaufman, now a professor at Duke University, said in a phone interview. “I flat out do not believe you can monitor the conflict of interest.”

As regulators write the Volcker rule they have also come under pressure from lawmakers.

Representative Spencer Bachus, the chairman of the House Financial Services Committee who voiced concerns over the reach of the rule in a November comment letter, said the proposal places the U.S. at a disadvantage. When the bill was crafted, the premise was “that Europe and the rest of the world were going to prohibit all sorts of banking activities, therefore we didn’t have to worry about competitiveness,” Bachus, an Alabama Republican, said in a telephone interview. “But the other countries have taken a whiff on this.”

Levin and Merkley

Democratic Senators Carl Levin of Michigan and Jeff Merkley of Oregon, who pushed for the regulation during the congressional debate, have urged regulators through comment letters, public speeches and staff meetings to maintain the rule’s maximum reach.

Merkley and Levin were responsible for the inclusion of language in the Volcker rule that would ban transactions or an activity that results in a “material conflict of interest” between the banking entity and its clients, customers or counterparties.

Levin, the chairman of the Permanent Subcommittee on Investigations that conducted a two-year investigation of the financial crisis, said the provision targeted the actions of firms like Goldman Sachs during the crisis.

The rule “breaks new ground in the area of conflict of interest,” Levin said on the Senate floor on July 21, the anniversary of Dodd-Frank. “It prohibits firms from assembling an asset-backed security and selling it to clients while betting against that same security, acting not as a market-maker, but as an investor for its own profit.”

--Editors: Lawrence Roberts, Gregory Mott
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Reply Wed 12 Oct, 2011 11:41 am
SEPTEMBER 19, 2011
Volcker Rule Draft Said To Allow For Repo Transactions, Lending-FT

U.S. regulators, in a draft of rules governing the Volcker rule, are proposing to carve out exemptions for so-called repo transactions and securities lending, the Financial Times reported Sunday on its website, citing a copy of the draft seen by the newspaper and confirmed by people familiar with talks between regulators.

In addition, regulators are proposing permitting the near-term trading in currency and commodities -- but not futures, according to the draft.

According to the draft, the Volcker rule would exempt "positions arising under certain repurchase and reverse repurchase agreements or securities lending transactions (and) bono fide liquidity management." Additionally, "positions in loans, spot foreign exchange or commodities" would be allowed.

The draft, dated last month, would impose a ban on short-term trading that might "significantly increase the likelihood that the banking entity would incur a substantial financial loss or would fail."

The Volcker rule, named for former Federal Reserve chairman Paul Volcker, is part of the Dodd-Frank regulatory overhaul of the financial sector.

Full story at: www.ft.com/intl/cms/s/0/313b2604-e20e-11e0-ba6e-00144feabdc0.html#axzz1YOfAbQ4n

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